Working Paper: CEPR ID: DP13295
Authors: Dirk Bergemann; Tibor Heumann; Stephen Morris
Abstract: We consider demand function competition with a finite number of agents and private information. We analyze how the structure of the private information shapes the market power of each agent and the price volatility. We show that any degree of market power can arise in the uniqueequilibrium under an information structure that is arbitrarily close to complete information. In particular, regardless of the number of agents and the correlation of payoff shocks, market power may be arbitrarily close to zero (so we obtain the competitive outcome) or arbitrarily large (so there is no trade in equilibrium). By contrast, price volatility is always less than the variance of the aggregate shock across agents across all information structures, hence we can provide sharp and robust bounds on some but not all equilibrium statistics.We then compare demand function competition with a different uniform price trading mechanism, namely Cournot competition. Interestingly, in Cournot competition, the market power is uniquely determined while the price volatility cannot be bounded by the variance of the aggregate shock.
Keywords: Demand Function Competition; Supply Function Competition; Price Impact; Market Power; Incomplete Information; Bayes Correlated Equilibrium; Volatility; Moments; Restrictions; Linear Best Responses
JEL Codes: C72; C73; D43; D83; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structure of private information (D82) | market power (L11) |
| market power (L11) | price volatility (G13) |
| information structure (L15) | price volatility (G13) |
| information structure (L15) | market power (L11) |
| price volatility under complete information (D89) | price volatility (G13) |